Creating A Board Of Directors
The board of directors is a group of people that represent the shareholders of a company or stakeholders of an educational or non-profit institution. In other words, the board of directors provides oversight for the good of the organization (and so investors in many cases) and not the parties in management at an organization.
Limited Liability Corporations (LLCs) are not required to form a board of directors but C Corporations, S Corporations, and non-profits are required to form a board. This protects donations and contributions as well as investors.
The board does this by defining executive compensation, bringing on or releasing senior executives, controlling options on stock, managing dividend policies, and one of the most important, reviewing corporate finances. Those are the official duties.
So far, this might sound like something a startup founder wants nothing to do with. But it’s important not only to protect shareholders but also for a number of other reasons! The board of directors is often also there to help with goals, support executives with guidance, set goals, make sure there are plenty of resources (sometimes by helping find additional investors to fund the company), make industry connections, and provide a wealth of experience.
We want to make sure we’re dotting the I’s and crossing the T’s. No one wants to accidentally break the law or end up in a legal action. The board helps with that and so much more. To begin, we’ll develop bylaws to set the powers of the board and its structure. That can be fairly specific so we won’t cover bylaws in this other than to strongly recommend the entity helping file articles or incorporation provide official legal guidance (and perhaps act as an observer in board meetings).
Most boards will start with three to five people and as we grow maybe hit seven. Some organizations have up to 30 people on the board but that’s unwieldy for a smaller company (and dilutive as we’ll get into when we cover board compensation). Let’s look at a common makeup of a board:
Chairman of the Board: Someone with board experience, maybe a CEO or investor from an adjacent industry but able to act as an advisor to founders of a startup and help groom them.
Founder(s): One of the founders who still works at the company and so represents employees, shareholders, and the executive team (even if the executive team is both people that work at a really early-stage startup). This position is often referred to as an “inside director.”
Investors: Often the first one or two investors will end up with board seats. As we grow they may be replaced with later-stage investors when cap tables get cleaned up, or if we really like the angel(s) we may elect to grow a board in order to keep them on. In an early-stage startup with a couple of people on the team, this person might act as Chairman, along with a founder and someone with industry knowledge.
Independent: One of the best members of a board is someone that understands the industry. This should be someone with experience, maybe considered an influencer or expert in a given market. It may be a name many recognize in the industry, an executive from an established non-competitive organization, and/or someone with a lot of experience that can explain industry-specifics to other board members and help provide guidance to founders.
Various countries might have specific requirements based on industry, board size, and market capitalization. Also, keep in mind that most boards should be odd numbers. So we grow from 3 to 5 to 7. If there will be even numbers of members make sure to define clearly what voting structures are in place to handle tie votes (e.g. the Chairman might only vote if there’s a tie - or inside directors do not vote, etc). For more on
Now that we understand how a board is structured, let’s look at recruiting members of the board.
Recruiting a Board
Let’s start with a board of three. We likely want one of the founders, an investor, and a domain expert from the community the organization serves as the independent. Additional members can be recruited and added later. In most instances, we can file the articles of incorporation with just founders and start looking for additional members once we start looking to go from a stealth company to something more.
One of those parties is likely to stay with the board. The inside director role is often the founder acting as CEO - a natural fit for the first seat. This person should learn and/or brush up a little on Roberts Rules of Order and understand their legal duties to be on a board to keep legal. Again, a good legal counsel on such matters is a great thing to have.
Another party on most boards is the initial investor. The investor who leads our funding is a natural fit for the second. This person may end up being replaced in future rounds of funding and often acts as the voice of reason, especially at first. Recruiting this board member is often a result of raising funding, unless a company is completely bootstrapping. Then the founders are the source of funding and we can potentially end up with multiple inside directors.
The independent likely only has the shares allotted them in board compensation. This is therefore sometimes one of the harder people to recruit to be on the board. Someone who’s an icon in an industry might not want to spend the time or potentially risk their good name by getting involved in a new adventure. Additionally, if they work at a large organization they may be wary of conflicts and not want to go through the hassle of asking for permission from an employer. Recruiting an independent is important, though.
To find an independent, look around for someone that meets these requirements. Once found, reach out through social media or get an introduction from a shared contact (preferred). Ask for coffee (or a call if remote or during a pandemic). Introduce yourself and take them through your philosophy and see if there’s a match. Don’t stretch too far if there’s not a match. It’s better to work with someone you like than with someone who is going to be a terrible to work with. Having said this, we want to be challenged, that’s what they’re there for.
Not all people are going to be happy to just hop on the board. Here are some tactics to sell them on the idea:
Take them through the investor pitch deck.
Explain “why” the innovation is going to help shift the industry.
Appeal to them as thought leaders who can help shape the way the innovation will help shift the industry.
Don’t ask for money - there are other investors for that. An independent should be independent.
Post a request on websites used to recruit board members to help find diverse candidates.
Keep diversity in mind. People from different backgrounds bring in new ideas, fresh perspectives, and challenge our assumptions.
Ask if they could sit in on a sales call and critique.
Invite them to join the product management to get perspectives.
Explain the expected growth and how they can be a part of something awesome.
Don't be afraid to show enthusiasm both for the project and for having them as a part of the project.
We should choose our board members wisely as they can help or hurt any startups chances of success. But sometimes board members choose to step away or can become combative and need to be removed. We’re not stuck with our initial board forever. Usually if we simply ask, a board member will step aside. But once elected, board members can be voted out or removed for reasons defined in the bylaws, such as:
Create inappropriate conflicts of interest.
Use a board vote as a means of getting something from a third party.
Use the board powers, authority, or knowledge for their own benefit rather than the benefit of the corporation.
Disclose proprietary information.
Many of the issues that arise though, can be gotten in front of easily by simply being clear about roles, goals, and expectations. But that’s a common theme of ours at Bootstrappers!